If the project profitability index of an investment project is zero, then:
A)the project's internal rate of return is less than the discount rate.
B)the project's internal rate of return is greater than the discount rate.
C)the project's internal rate of return is equal to the discount rate.
D)the relationship of the rate of return and the discount rate is impossible to determine from the data given.

Question

Quizplus · Accepted Answer

The project profitability index (PPI) is calculated as the present value of cash inflows divided by the present value of cash outflows. A PPI of zero indicates that the present value of cash inflows is equal to the present value of cash outflows. Therefore, the discount rate used to calculate the present values must be equal to the project's internal rate of return (IRR) because this is the rate at which the project's cash inflows are discounted to equal the present value of the cash outflows. Thus, the correct answer is C, where the IRR is equal to the discount rate.

If the Project Profitability Index of an Investment Project Is